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Edited on Mon Sep-20-04 07:53 PM by GoreN4
Aside from all the debt manipulation re US statistics, inability to address the strucutal issues re the US trade deficit, not to mention the $7.2 Trillion dollar deficit, I really don't put too much faith in contemporary economics as I have begun to see the limitations in current theroems (this appplies to all economics, not just US issues). For those interested in this subject, the new video, "The End of Suburbia" begins to hint at I expect over the next 10-15 yrs.. Anyhow, here's an exert from my upcoming book re the crucial issue of what I forsee as physics vs. economics. (Hint: Mother Nature and the laws of physics are non-negotiable...) The Enigma of Peak Oil: Physics versus Economics In conjunction with the massive energy related challenges of this new century, the second daunting issue regarding Peak Oil is the more intrinsically complex phenomena that may result in a profound clash; the Laws of Physics versus the Theory of Economics. The world’s industrialized economy requires electricity on demand in order to perform the majority of economic activity. In other words, economic growth is predicated on electrical power, which in turn must grow commensurate with the economy. In turn, the generation of electrical power is produced primarily by burning hydrocarbon molecules, especially natural gas (also known as methane). Following a peak in natural gas production, by default an increase in demand for electrical power may not be possible when a significant portion of current power production is produced in powered plants that burn natural gas. Simply put, current or increasing levels of demand for electrical power may theoretically not be possible once the peak in natural gas occurs. If this situation replayed itself in various industrialized nations, the global community could experience a net decrease in overall available energy. The global peaking of natural gas seems likely within two decades, and would imply that decreased electrical power will force a potentially negative “growth rate.” Current theorems of economics do not allow for such a phenomenon. If that scenario were not problematic enough, the enigma of Peak Oil also presents questions about growth of the overall monetary supply. If oil is a required component in the industrialized economies for economic activity (95% of transportation), once the world’s net energy decreases past Peak Oil, does that imply a net decrease in the overall money supply? In 1981, Dr. Hubbert offered the following profound reflections during a lecture at MIT: “The world’s present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin .
The first of these two systems has been responsible for the spectacular rise, principally during the last two centuries, of the present industrial system and is essential for its continuance. The second, an inheritance from the pre-scientific past, operates by rules of its own, having little in common with those of the matter-energy system. Nevertheless, the monetary system, by a loose coupling, exercises a general control over the matter-energy system upon which it is superimposed.
Despite their inherent incompatibilities, these two systems, during the last two centuries have had one fundamental characteristic in common, namely exponential growth, which has made a reasonably stable coexistence possible. But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over . The monetary system has no such constraints, and, according to one of its most fundamental rules, it must also continue to grow by compound interest.”
“… crisis in the evolution of human society. It’s unique to both human and geologic history. It has never happened before and it can’t possibly happen again. You can only use oil once.” 218
The late Dr. Hubbert is suggesting in the above passage that it will soon become problematic for the money supply itself to increase beyond the peaking of oil taking into account that access to cheap energy has become a necessary precondition for economic growth in our industrialized system. For the past 100 years, the abundance of hydrocarbons has driven the industrialized economies of the developed nations, and more recently, the global economy.
Unfortunately, no substitutes providing equal energy output per weight or volume has been discovered, nor are any likely sources to become available before the onset of Peak Oil.
Dr. Hubbert’s philosophical observation proffers that the finite availability of matter-energy could, or perhaps does, place an immutable constraint on the growth of the monetary system itself. Perhaps these rather profound reflections are part of the reason why the majority economists refuse to provide much if any commentary on the issue of global Peak Oil, other than to say the “market will find substitutes” as the price of oil goes up. Nonetheless, Sir Martin Rees, the Astronomer Royal of the United Kingdom, has also pondered the implications of Peak Oil as regards economics, and implied that governments may fear the current “Financial System” based on unlimited economic growth and interest payments will simply cease to work after Peak Oil.
“The Second Half of the Oil Age now dawns. It is characterized by the decline of oil production and all that depends on it, including most significantly the Financial System. In logic, the onset of oil decline undermines the very foundations of the economic system, which may accordingly collapse long before oil runs out or becomes in serious short supply.”
“…The recognition of the End of Economics will likely have a greater impact than the actual gradual physical decline of oil itself. The enormity of the issue explains why Governments cannot bring themselves to plan or prepare. It may even prompt some to indulge in resource wars to evade the situation for as long as possible or at least until after the next election.” 219
Without doubt, the author is not aware of any economic models reflecting the apparent discontinuity between matter-energy constraints and current economic theorem based on unconstrained growth. It would seem that current debt obligations based on future economic growth begins to come into conflict if and when a net reduction in the available global energy supply occurs due to the phenomenon of Peak Oil. Taking into account the majority of complex economic activity today is dependent on a depleting energy source – burning hydrocarbon molecules - how could future revenue pay for current debts if economic growth becomes negative?
In essence, the concept of banks applying interest on debt obligations that will be paid on the growth of future earnings becomes a problematic construct. Carried to its logical conclusion suggests inevitable debt repudiation – categorically on all debts based upon economic activity that is dependent on increasing levels of electrical power. Theoretically, that would by default mean the collapse of The Banking System. The implication of Peak oil is indeed a profound quandary.
It is unpredictable how the current global financial system will react to Peak Oil, a concept that represents the ‘Mother of all Conundrums.’ Perhaps an entirely new paradigm will eventually evolve that includes ecological metrics such as Energy Return on Energy Invested (EROEI), a sort of ‘ecological economics’' that takes into consideration the ecosystem, including biophysical laws and related ecological limitations. In this author’s opinion, whoever successfully constructs a viable mechanism for ‘ecological economics’ will likely deserve the Nobel Peace Prize.
218. Heinberg, Richard, The Party’s Over, op cited, p. 91
219. Rees, Martin, Our Final Century: Will the human race survive the twenty-first century?, William Heinemann, 2003
(seperate/preceeding subchapter re EROEI)
EROEI and Alternative Energy Technologies
One of crucial concepts required to understand the importance of Peak Oil relates to a concept in physics commonly described as Energy Return on Energy Invested, or EROEI. Unlike the traditional financial metric referred to as Return on Investment (ROI), EROEI refers to the amount of energy spent compared to the amount of energy extracted. EROEI is illustrated as ratio between energy expended to extract a barrel of oil, versus the energy that barrel of oil will provide.
From a physics perspective the amount of energy required to extract the oil after peak begins to increase irreversibly, resulting in a decrease of Energy Return on Energy Invested, which under a certain value means the remaining oil will not be viable for transportation. Below are definitions of illustrating the fundamental differences between ROI and EROEI:
ROI versus EROEI
ROI (Return on Investment) means the accounting is done in dollars. If an oil well produces enough oil to cover expenses with some left over, then the ROI is positive. Some oil is too expensive to produce at the current price of oil. An economist would say that that oil would be produced if the price of oil rises sufficiently.
EROEI (Energy Return on Energy Invested) means that the accounting is done in energy units. It is possible to calculate the energy cost of an oil well. Energy is required to make the steel, to run the drill, to pump the oil, etc. This energy is subtracted from the energy in the produced oil. If the result is positive, the energy return on energy invested (EROEI) is positive. Drilling for oil to get energy becomes pointless if the EROEI goes negative. That does not mean that oil wells will not be drilled. It means that oil will be used for fertilizers or plastics, but not for transport or heating. 212
Fifty years ago when some of the super giant oil fields were be still being discovered, an EROEI from one the oil wells of these super giants could sometimes produce an EROEI of 200. In contrast, oil wells in deep water currently achieve an EROEI of less than 5.
To recap, oil removed form tar sands as found in Canada have a very low EROEI of only 0.7, and a slow extraction process. Once global peak oil is reached and exceeded, at some point on the downward side of Hubbert’s curve, the remaining oil in the ground, or at the bottom of the ocean, will not provide a positive EROEI for transportation or possibly even extraction for industrial use.
Importantly, when the energy required to extract such low-grade or geographically undesirable oil is equal or greater than the energy that would be provided by that new barrel of oil, it will no longer be logical to expend the energy to extract the oil. At that point the oil will simply remain in the ground.
After oil, the most important hydrocarbon for energy use is natural gas, or Methane gas using the industry’s terminology. The situation regarding natural gas is no better than that of oil. Energy experts such as Matthew Simmons have stated that enduring natural gas shortages in the U.S. are imminent. He predicts this may ultimately result in power interruptions similar to what happened on August 14, 2003 when 57 million people in northern U.S. and into Canada experienced a power black-out. Canada currently exporting 50% of its natural gas into the U.S., but this practice may not be sustainable as their own domestic supply will soon reach its peak.
According to Julian Darley, a British environmental researcher and author of High Noon for Natural Gas, both the U.S. and Canada are experiencing near critical declines in natural gas production.
“…Canada is definitely in a very serious, permanent natural gas production decline, and that matters for the US because Canada has been supplying 15-18% of US natural gas. We’ve reached a peak of that just a couple of years ago, it’s declining now, and that’s another major reason why the US hasn’t seen another gas crisis in the last 15 years, because Canada has been sending more than half of its gas south. That is a situation which is now changing, so there are a number of reasons which are boiling up, including Canadian natural gas production declining, US natural gas production holding or declining , but demand for it always trying to increase.”
“…one is left then, if you are in government, the only, if you like, business as usual solution, which I think is a very bad solution for the reasons already stated, particularly to do with war and political destabilization, not to mention the unfortunate effects on the population where the gas has to come from – it’s going to mean liquefied natural gas with very expensive importing terminals, ships which are huge and very expensive, and an interesting target for, let’s say, people who have a grudge against the US, and it could go off in an interesting kind of conflagration.”
…”definitely there’s a huge push going on in the US. I think it should be resisted greatly, but one has to realize that if you resist natural gas it’s going to mean cutting your electricity demand. I don’t think there’s any other way around that, so this is very important.” 213
Unfortunately politicians on the right and the left are either in to be in deep denial about this, or they dare not speak about it.
Regardless, the technical analysis is available and relatively easy to understand for those willing to do some research. Although many environmental groups advocate that alternative energy technology cam be implemented and provide requisite levels of current energy production, an objective analysis of EROEI data irrefutably indicates that no single - or combination - of alternative energy technologies could prevent a *net reduction* in global energy/electrical capacity. None of the currently discovered energy alternatives, even exciting new technologies such as “Thermal Depolymerization” (TDP) can begin to provide the energy base currently provided by our hydrocarbon-based infrastructure and transportation systems before Peak Oil. 214
Oil and gas are not mere commodities; as demand for these substances is relatively inelastic considering that no viable substitutes have been found or developed that can support the projected energy demand of the industrialized economies. The U.S. is the most prolific energy consumer of all, and is the most as risk for economic dislocations when Mother Nature reveals the finite nature of hydrocarbons. We must face these facts with both hope and incomparable personal resolve, as global Peak Oil will define the major geopolitical, economic and societal events of 21st century. Indeed, the passing of Peak Oil will test the human condition.
212. “World Oil Reserves,” The Coming World Oil Crisis, http://planetforlife.com/oilcrisis/oilreserves.html
213. Transcript of Julian Darley, author of High Noon for Natural Gas, discussing natural gas depletion and responses with Sue Supriano of Steppin' Out of Babylon, on August 18, 2004. Copy of transcript can be found at the following url: http://www.globalpublicmedia.com/INTERVIEWS/JULIAN.DARLEY/
214. Lemley, Brad, “Anything Into Oil: Technological savvy could turn 600 million tons of turkey guts and other waste into 4 billion barrels of light Texas crude each year,” DISCOVER Vol. 24, No. 05, May 2003
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